the solutions series

INSIDE NORTH AMERICA’S LARGEST CARBON MARKET

Ten Lessons from the Front Lines of Quebec’s Fight Against Carbon Pollution Sources Introduction

We conducted all of our interviews Policy Developers In 2012, Quebec became the first Canadian These interviews focused on a few key questions province — and only the second jurisdiction that dug into the politics and process of confidentially, and we assured Line Beauchamp* interviewees that their specific Ministre du Développement durable, de l’Environnement in North America — to enact a cap and trade adopting a cap and trade system: et des Parcs, Province of Quebec system for greenhouse gas (GHG) emissions comments would not be attributed • What motivated the development and Jean Charest* under the Western Climate Initiative. When to them by name. However, some Premier, Province of Quebec introduction of a cap and trade system in the province formally linked with California’s Quebec? participants opted to put some or all system on January 1, 2014, the partnership Government Policy Advisors of their comments “on the record.” became the most comprehensive carbon trading • What are the key policy-design decisions that Claude Côté All ten interviews were conducted 1 governments considering such an initiative Conseiller, Bureau des changements climatiques system in North America. While the market by telephone. Ministère du Développement durable, de l’Environnement has only just completed its second joint auction, would need to make? What are the pros and et de la Lutte contre les changements climatiques, we wanted to explore the lessons the province cons of these choices? Province of Quebec learned in developing and implementing what is • What kind of response might governments Expert Commentators now the continent’s largest carbon market. expect if they introduce this kind of policy, and Erick Lachapelle During the fall of 2014 and earlier this year, how can governments ensure that the response Professeur adjoint, Directeur du programme en économie Clean Energy Canada conducted a series of is as favourable as possible? et politique, Université de Montréal confidential, candid interviews with the policy’s Karel Mayrand We’ve distilled our findings from these Director General for Quebec and Atlantic Canada with the architects and with expert observers who have interviews down to ten key takeaways focusing David Suzuki Foundation, and chair of Al Gore’s Climate watched its development and implementation. on the development of Quebec’s cap and trade Reality Project in Canada We spoke with elected representatives and system under the Western Climate Initiative. Mary Nichols officials working in Quebec’s government at the 2 Chair, California Air Resources Board Together with our assessment of British time, and experts from the business, academic, Jean Nolet Columbia’s Carbon Tax, we have provided a President, ÉcoRessources and environmental communities within comprehensive look at how existing carbon the province. We also sought commentary Vincent Pouliot pricing systems operate and how they can serve Chef de service - Marché du Carbone et Efficacité from California — Quebec’s carbon market as useful lessons for jurisdictions considering énergétique chez Gaz Métro partner — to provide an inclusive look at the adopting such a system. Hugo Seguin players intimately involved in shaping and Fellow, Centre d’études et de recherches internationales The key findings from our interviews are responding to this ground-breaking policy. de l’Université de Montréal (CÉRIUM) summarized on the next page and described in Katie Sullivan more detail in the pages that follow. Questions Director, North America & Climate Finance, IETA posed to interviewees are included in Appendix A. *Title as of 2008, when the carbon tax was introduced.

1 Klinsky, Sonjia (2013). Bottom-up policy lessons emerging from the West- 2 How To Adopt a Winning Carbon Price: Top 10 Takeaways From the Architects ern Climate Initiative’s Development Challenges. Climate Policy, Vol 13. No2. of British Columbia’s Carbon Tax, Clare Demerse, Clean Energy Canada, 143-169. February 2015. Available at cleanenergycanada.org. 2 3 Top 10 Takeaways Considering a cap and trade system? Here’s what you really need to know.

1. You’ll need strong political leadership and a citizenry primed for climate action.

6. Commit to openness, 2. Partner with other jurisdictions to fairness, and transparency. create new opportunities and lower the “cost” of participation. 7. Address competitiveness concerns with a home-grown approach. 3. Invest in education. Develop in- house expertise, and learn from others. 8. Design your system to support economic success. 4. Take the mistakes of others, fix them, and turn 9. Don’t expect your cap and trade system to them into benefits. do everything; consider it one component of a full suite of climate policies. 5. Invest auction revenues in tangible climate 10. Get ready for the solutions. global spotlight.

4 5 A Cap and Trade Primer The mechanics and impacts of Quebec’s cap and trade system

• The final sale price of each emission unit auctioned is • Beginning in 2015, in order to encourage GHG reductions, On January 1, 2013, Quebec took a bold step toward fight- companies/entities that are part of the market. If the emis- the lowest price bid for which the last emissions unit is the number of free units decreases at a rate of one to two ing climate change by launching a cap and trade system sions are greater than the allowances allocated, then the awarded.8 percent per year. under the Western Climate Initiative’s (WCI) carbon market. company must purchase allowances from those who have A year later, when Quebec linked its system with California’s, them for sale, at auction, or acquire offsets (see below). If • In Quebec’s cap and trade system, trading period is • Electricity and fossil fuel distributors don’t receive free it created North America’s largest carbon market. the company does not have enough allowances or offsets referred to as the “compliance period”. Allowances are allocations. to cover their emissions, the regulator will impose penalties. allocated and auctioned within this period.9 While it is too early to draw conclusions on Quebec’s long All proceeds of the auction of units go into Quebec’s “Green • The price per unit from the last joint auction held in term economic performance under the cap and trade Surplus allowances are traded and priced according to sup- Fund” to finance various initiatives outlined in the province’s February 2015 was $12.21/tonne. system, a great deal remains to be learned from how the ply and demand. As the regulator gradually lowers the cap 2013 - 2020 Climate Change Action Plan. These include public system came together. Quebec is the first subnational juris- on emissions, fewer allowances are available. This creates • Compliance periods last three calendar years each as of transit, research and innovation, green energy, and dealing diction in Canada to develop a cap and trade system, and a demand for allowances, which increases their value or January 2015 (2015-2017, 2018-2020, and so on). Rules with residual municipal solid waste.14 the first in Canada to do so under the Western Climate Ini- price. Over time, industries that use carbon-intensive tech- pertaining to the free allocation of allowances are only set tiative. Thus far, the system has also survived two changes nology will find it more economical to upgrade to lower- by regulation until 2020. All allowances have to be surren- in government.3 carbon technology to reduce their need for allowances. dered by the first of November following the end of the compliance period.10 What is cap and trade? What is an offset? What does the system cover? Cap and trade is a form of market regulation applied to Offsets are initiatives undertaken by non-regulated indus- greenhouse gas (GHG) emissions. tries that reduce or remove greenhouse gas emissions, and • Persons or municipalities operating a facility with annual which can be sold to emitters to help meet their compli- GHG emissions greater than or equal to 25,000 tonnes of The “cap” puts a limit on the maximum amount of GHGs ance obligations. To be eligible as an offset, the regulatory equivalent carbon dioxide a year.11 that can be emitted, which is then translated into a number authority must validate projects. In Quebec and California, • The system covers close to 85 percent of Quebec’s GHG of allowances. Allowances can be distributed free to some offsets are limited to eight percent of the compliance emissions. At its outset in 2013, this included the indus- or all covered entities or auctioned to highest bidders within obligation. trial, manufacturing, and electricity-generating sectors. a competitive bidding process; each emission unit usually 3 The Liberal Party formed government from 2009 - 2012, the Parti In 2015, coverage expanded to include GHG emissions represents one tonne of GHG.4 Companies must match Québécois from 2012 - 2014, and the Liberal Party from 2014 - present How does it work? related to the use and combustion of fossil fuels that are their emissions to their allowances. Over time, the overall 4 http://www.ieta.org/index.php%3Foption%3Dcom_content%26view%3D 12 • In Quebec’s system, sectors perceived as trade-vulnerable sold or distributed. article%26catid%3D54:3-minute-briefing%26id%3D205:cap-%26-trade- cap is lowered, leading to reductions in GHGs. basics receive emission allowances free of charge. These sectors • In addition, the cap and trade system is open to individu- 5 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- The “trade” creates a market for emission or carbon include: aluminum, lime, cement, chemical and petro- als or entities that would like to participate in the carbon spede/technical-overview.pdf allowances. A company that is part of a capped sector must chemical industry, metallurgy, mining and pelletizing, pulp market, even when there is no regulatory obligation for 6 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- 5 spede/in-brief.pdf report its total emissions. If its emissions are equal to its and paper, and petroleum refining, among others. them to do so.13 7 Ibid.

allowances, then the emitter is compliant. At the end of the • Emission units not allocated free of charge are auctioned 8 Ibid. compliance period (in Quebec, three years), the emitter off, at most up to four times a year. Since January 2014, Distribution of Emission Units 9 https://icapcarbonaction.com/index.php?option=com_etsmap&task= must return its allowances to the regulator. Quebec and California have held these auctions jointly.6 export&format=pdf&layout=list&systems%5B%5D=73 • For 2013/2014, industrial emitters exposed to foreign 10 Ibid. • The floor price for the joint auction is set by selecting the 11 Excluding CO2 related to the combustion of biomass. If total emissions come in below the allocated allowances, competition received most of the emission units they higher of Quebec or California’s minimum price at the needed free of charge so as to prevent “carbon leak- 12 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- the company has unused allowances — a surplus — which spede/in-brief.pdf predominant exchange rate.7 age” — that is, the movement of companies to jurisdictions it can then choose to bank, surrender (for compliance 13 Ibid. without a cap and trade system. during the current compliance period) or trade with other 14 http://www.mddelcc.gouv.qc.ca/changementsclimatiques/programs.htm

6 7 1. You’ll need strong political leadership and a citizenry primed for climate action.

It takes a strong leader to make change happen, and so Charest had no shortage of leadership in his cabinet. when we asked each of our interviewees, “what motivated Behind the cabinet’s collective support for climate action, the government to introduce a cap and trade system?” the throughout the process he relied heavily on three answer was often the same: Quebec deeply believed in environment ministers: In their own words climate change, and it was firmly within then-premier Jean • Claude Béchard, who formulated the government’s over- Charest’s priorities. all climate policy in 2006; “There was strong political leadership from Charest. He was convinced Quebec had an advantage with respect to total energy • Line Beauchamp, whom interviewees say did much of the that this was the right thing to do, and he did it right at the peak of use, as it sources its electricity almost entirely from water heavy lifting on the actual policy design and delivery; and resources (hydroelectric).15 Even so, in 2006, then-premier climate concerns in Quebec.” – Karel Mayrand, David Suzuki Foundation Jean Charest, leader of Quebec’s centre-right Liberal party, • Pierre Arcand, who handled some of the more compli- felt more could be done. With the introduction of its cated issues of the implementation, especially with the “We had a Premier who was profoundly convinced and engaged in Climate Change Action Plan, Quebec brought in a carbon business community. tackling climate change. Yes, you need strong Ministers — but honestly, I levy on the carbon content of fossil fuels, making the Interviewees reminded us that in Quebec, a general con- province the first jurisdiction in Canada to send a carbon don’t think we would have got there without a Premier who believed very sensus exists on the need for climate action. This consen- price signal to its economy. Seven years later, Charest sus created the necessary environment to enable action. strongly in this initiative.” – Interviewee would announce that Quebec’s carbon market under a Quebecers know and understand that human activity cap and trade system was in full operation, reflecting his causes global warming; therefore, caring about climate “This choice of policy reflects an ethic of enlightened self-interest in commitment to using economic instruments to further disruption is a political winner in the province. a social good. Quebec. They saw where the world was going in terms of carbon markets, Charest saw cap and trade as a real opportunity to show- Cross-government collaboration proved one of the more knew they could reduce GHGs by becoming more efficient, and they case all of the province’s investments in hydro, hydro challenging elements of the cap and trade system’s intro- exports, manufacturing, and aluminum — all of which had wanted to get credit for it. Charest also perceived himself as a leader on duction. Political and government interviewees all cited been working effectively to reduce emissions since the Charest’s leadership as essential. the environment; he was a policy entrepreneur. Looking at Governor 1990s. For Charest and his majority Liberal government, It took more than a strong commitment to the environ- a cap and trade system would position Quebec as a clear Schwarzenegger, Premier Campbell — you need that kind of leadership at ment to introduce a price on carbon; it also required com- winner in a global economy already heading in the mitment from the Finance Ministry to deal with pricing direction of decarbonization. Interviewees also credited the very top, because there will be some bumps in the road.” and exchange, and from the Industry Ministry to consider public support for climate action as the reason why car- – Erick Lachapelle, Université de Montréal stakeholder support and trade — though neither depart- bon-pricing policies have survived changes in government: ment held any part of the climate change file. It took a the public saw it as Quebec’s opportunity to lead.16 “If you have a leader that’s going to go to the wall on doing something on policy champion — in this case the former federal Environ- These factors, in combination, helped Quebec develop and ment Minister and now Premier — to make it happen. climate change, you can get things done. It became a legacy issue for him.” implement a leading climate change policy — and be the first of Canada’s jurisdictions to do so under the Western – Katie Sullivan, IETA Climate Initiative. But the driving force was the carefully calculated direction of one politician’s personal convictions and his deep desire to build a strong economy for his province.

15 http://www.hydroquebec.com/about-hydro-quebec/who-are-we/hydro- quebec-glance/html

16 A Parti Quebecois government held power in the province from 2012-2014

8 9 2. Partner with other jurisdictions to create new opportunities and lower the “cost” of participation.

Though Quebec’s cap and trade system, like California’s, When asked to cite downsides of interlinked systems, our is very much the result of provincial and state legislation, interview subjects flagged the cost of emission units, and both operate under the guidelines of the Western Climate the debatable benefits of having them available at a lower “We gave a lot of thought to how to make the trading program work Initiative. The Initiative is a voluntary subnational intergov- cost. In the linked system, California has a surplus of units, ernmental organization initiated in 2007.17 thereby reducing the price of units at auction. Many of our well, to ensure that there were separate and different benefits for interviewees pointed to the fact that this results in Quebec When Quebec linked its cap and trade system with that of each jurisdiction. The fact is both Quebec and California have similar companies purchasing units at a cheaper rate in California California in January 2014, it established North America’s to meet their emissions targets, leading to a “flight of largest carbon market. Our Quebec-based interviewees ambitions that are compatible over the long term – and this is what made capital” from Quebec to California. cited two tangible benefits of the relationship: The spill over it net out in a fair and balanced partnership.” – Mary Nichols, California Air effect of California’s positive reputation in terms of policy Others said the California linkage is easier on Quebec leadership, and the creation of a market large enough to businesses, citing the attractiveness of lower private-sector Resources Board generate sufficient credit to ensure robust trading. compliance costs. They argued that the flight of capital would “net out” over the longer term as other jurisdictions “Quebec joining with California gave credibility. Quebec was the only Having more players creates a more fluid and dynamic join and Quebec establishes emissions reductions targets market. This fact was undisputed among our interviewees, Canadian province to do it, so it put some of its industries at a competitive beyond 2020.18 who also saw the need for a large market to support the disadvantage (or so they argued) — especially when compared with function and credibility of a cap and trade system. Finally, several of our interviewees cited a non-market- based benefit: the opportunity to demonstrate how a Ontario. So acting with other jurisdictions makes it more credible, Politically, California was described as a “leading state,” program of this magnitude can have broad appeal even where fuel efficiency standards “set the pace for both the especially with California. It gives value to the system.” – Karel Mayrand, in a jurisdiction that differs in language and currency. US and Canadian national governments.” Interviewees felt Interviewees from both the state and the province cited David Suzuki Foundation strongly that the California link gave Quebec a degree of the collaboration as intensely positive in terms of both political cachet that another jurisdiction would not. This learning and outcomes. They believe this sends a message “Partnership is why the linkage matters so much. That’s why California cachet afforded the partnership a sense of confidence. The to other WCI partners (which have yet to introduce carbon personal relationship between then-Premier Jean Charest did it too — it doesn’t look good on anyone to be alone. Would Quebec regulations) that collaboration is possible and beneficial. and then-Governor Arnold Schwarzenegger helped, too. be their ideal partner? Probably not, but they were the only ones left standing.” – Interviewee “Honestly, if we didn’t have California, I’m not sure we would have been able to move alone. There was a strong consensus, but would we have been able to keep that consensus without California? We needed to show we weren’t alone in North America.” – Interviewee

17 Purdon, M., Houle, D. & Lachapelle, E. (2014). The Political Economy 18 California has committed to 80% below 1990 levels by 2050 of California and Quebec’s Cap-and-Trade Systems. Sustainable Prosperity Research Report, page 5 10 11 3. Invest in education. Develop in-house expertise, and learn from others.

“One of the things they did learn from the EU program was having that price floor, which is very important. The safety valve at the top end also gave comfort to industry that prices wouldn’t go skyrocketing in the near-term.” – Katie Sullivan, IETA “The Quebec government benefitted from the evolution in thinking from the European Union, from academics and from the experience with RGGI. They also benefited from having the WCI as a central coordinating agency to ensure their system would eventually comply.” – Erick Lachapelle, Université de Montréal “Quebec developed very significant expertise in carbon markets, so that they did not have to be a rule-taker in negotiations. They carefully stud- ied the EU experience.” – Hugo Séguin, Université de Montréal “We really studied the existing systems carefully. We looked at RGGI, and Courtesy of the Centre for Sustainable Development really learned a lot there, and we looked at the European Union’s (EU)

As mentioned earlier, it was important to Quebec — and Several interviewees who worked in government at the Emissions Trading System (ETS). We saw that you really needed a mini- personally to Charest — to use market-based tools to price time of the project’s development wanted to acknowledge mum price to avoid the problems the EU had with the ETS.” carbon emissions, but all of our interviewees noted that a “small but effective” group of dedicated staff, 10 to 15 creating a credible cap and trade system is an extremely individuals who “ate, slept, and breathed” the cap and – Interviewee complex process. On this front, Quebec had the opportu- trade policies and knew them so intimately that everyone nity to look to other jurisdictions for lessons learned. was able to stay on the same page and on message in a variety of negotiations and meetings. In addition to negotiating with California, the province witnessed the development of the Western Climate Initia- Hugo Séguin directly credited Environment Minister Line tive as a corporation providing administrative and technical Beauchamp with becoming an expert on cap and trade services to support the implementation of greenhouse policies. “Like Hermione in Harry Potter,” Beauchamp gas emissions trading programs.19 They also looked to learned the ins and outs of the carbon market so intimately the European Union and the Regional Greenhouse Gas that she was credited as “knowing more than some of the Initiative (RGGI) experiences. From this they learned two companies did.” major lessons. First, as one interviewee put it, “we really, really needed a price floor.” Second, there was a need to cover more sectors than the RGGI. It also helped to govern Quebec’s treatment of offsets in their system.20

19 http://www.wci-inc.org/index.php

20 For treatment of offsets, please see number 4

12 13 4. Take the mistakes of others, fix them, 5. Invest auction revenues in climate solutions. and turn them into benefits.

When we asked interviewees what made the biggest Any government considering a carbon-pricing system change in policy effectiveness for Quebec’s cap and trade must confront the most hotly debated question: Where system, the answer was consistent: cost containment. The “The allocation approach with do the revenues go? Various Canadian jurisdictions have “Quebec was increasing fees on all policy’s floor price and the Minister’s allowance reserve, taken different approaches to the conundrum. In fact, sorts of government services just to which acts as a price ceiling, were widely cited as critical to industry was good. [Government] even Quebec and California chose different paths; its long-term success. worked quite closely with affected California returns some revenues to citizens in the form generate revenues, but the Green of energy credits.22 Quebec developed its cap and trade system with great industries well in advance so that they Fund was additional investment in care. Its architects made deliberate decisions rooted in understood they needed a step-by- For its part, Quebec places all cap and trade revenue into things to combat the sources of cli- lessons learned from other jurisdictions. Interviewees step approach with gratis allocation at the Green Fund, which some interviewees expect will grow mate change that Quebec would not pointed to the process surrounding free allocations to to between $2.7 and $3.3 billion23 in the next eight years. the front end.” – Katie Sullivan, IETA be doing otherwise.” – Karel Mayrand, qualifying entities as a unique feature of the Quebec This decision helps ensure the system’s credibility, they David Suzuki Foundation system. Officials added this, they said, to address a “The system was designed not to hurt said, and helps make it politically palatable to climate- perceived shortfall in the European Union’s system. those sectors, thanks to free allocation savvy voters. Take transit, for example. The Green Fund “It’s a question of credibility. If we tell dedicates two-thirds of its funding to transit — a policy As one interviewee explained, “when emitters qualify for of allowances. The free allowances are not supported by all interviewees. The impact on rider- people that this matters, and there’s free allocation, we give two-thirds of the allowances at the almost a form of support to those sec- ship, however, is undeniable: “In 2010 or 2011 we broke a a system in place that will give a price start, and one-third afterwards, or the following year. So record for transit use that dated from 1947 — transit use if a company has increased its production, we give more, tors, but the system is set up to ensure signal to reduce emissions, it’s had been declining ever since [that post-war period],” one and if less, we cut their allocations.” The approach pre- it won’t have a damaging impact on essential the money actually goes to of our sources said. vents the inadvertent “over-awarding” of free allowances, trade-exposed sectors.” reducing emissions. It will fail without a pitfall of the European system which doles them out in In 2014, Quebec’s Sustainable Development Commissioner that — the system would lose credibil- one fell swoop. – Interviewee tabled a report specifically addressing the Green Fund. The assessment criticised the fund, and said it was lack- ity.” – Vincent Pouliot, Gaz Métro Our sources also cited offsets as a distinctive feature of “We didn’t try to crunch all of the ing in terms of project criteria, calls for proposals, clearly Quebec and California’s system — in particular the fact issues at once. We thought it was defined objectives, and program information.24 One “For the public, it makes sense to that compliance obligations are limited to eight percent. legitimate to make decisions gradually. interviewee agreed, suggesting “highly political objectives” spend revenues generated from cap Offsets are highly controversial in the cap and trade world, undermined the Fund, and said that its development and Quebec’s use of the instruments is no exception. We wanted to establish the principle, and trade on the deployment of alter- favoured projects in certain sectors, “like public transit, While some of our interviewees believe that the cap on get the system going, get the quotas native sources of energy. In Quebec, because they’re popular.” offsets can undermine both environmental integrity and decided, and that’s what we did.” the second most popular use of rev- the integrity of the cap itself, others vehemently disagreed. So while interviewees unanimously believed strongly that – Jean Charest, Former Premier of Quebec enues is to decrease the province’s They believe that offsets support cost containment,21 and auction revenues should be reinvested in climate solu- dependence on oil. While consistent, allow legitimate emissions reductions to occur in the non- “Design is tricky. Quebec had observed tions, many attached caveats. As one source suggested, “if covered sectors outside of the cap, driving cooperation we did other kinds of projects, we could be more oriented we don’t hear nearly as much this what had happened in Europe, where and creating a true market “link.” to results. We could set up formal requests for proposals outside of Quebec.” – Erick Lachapelle, faulty design had led to the collapse of (RFPs) to see what industry could come up with to help When asked about improvements that could be made, Université de Montréal the price in the system.” – Interviewee address climate change.” If given the opportunity to plan several sources agreed that the province should establish the system all over again, one participant said he would more long-term emissions targets, because businesses “If we take auction revenues and use bring industry into the loop on Green Fund allocations. require longer planning cycles. This would afford them to reduce dependence on im- businesses greater assurance, more incentive to act, ported fossil fuels, we’ll be building and strengthened stability over a longer time period. Quebec’s economy.” – Hugo Séguin, 22 Purdon, M., Houle, D. & Lachapelle, E. (2014). The Political Economy of Université de Montréal California and Quebec’s Cap-and-Trade Systems. Sustainable Prosperity Research Report, page 22

23 http://www.mddelcc.gouv.qc.ca/changements/plan_action/ pacc2020-en.pdf

24 http://www.vgq.qc.ca/en/en_publications/en_rapport-annuel/en_ 21 This is because offsets offer lower cost reductions than allowances fichiers/en_rapport2014-2015-cdd.pdf 14 15 6. Commit to openness, fairness, and transparency.

Cap and trade advocates take a lot of flack for the inherent complexity of their chosen approach. That’s why many of our interviewees stressed the importance of fairness, “It’s not so much that people didn’t care about the system going into openness, and transparency in system design. effect. I would argue that many small- and medium-sized enterprises Accountability boils down to three characteristics, our interviewees said: Public education and awareness, a didn’t know what was going on, and it showed.” – Erick Lachapelle, transparent system design — especially with respect to Université de Montréal industry negotiations — and an independent body to keep an eye on things. Without these elements in place, a cap and trade system’s long-term credibility is at risk. With “This was the aspect that created the most concern from industry: the them, it is far more likely to stand the test of time. idea that political distribution of allowances would give political favours Unhappy about their January 2015 inclusion in the to a given sector or competitor.” – Interviewee program, late last year oil companies leveraged low public awareness of cap and trade to launch a negative public- “We were surprised by the lack of awareness among the public and even relations campaign. The companies floated the spectre of Quebec’s provincial government manages all aspects of high gasoline prices in an effort to build public opposition its cap and trade system, including the offsets protocol within some of the regulated sectors. This is particular to Quebec – the to carbon pricing. Some of our interviewees felt this could development, registry, and issuance. Its American story in other WCI jurisdictions was different.” – Erick Lachapelle, have been avoided with a more informed public, but as counterpart is the California Air Resources Board one interviewee stated, “it wasn’t such a big deal once gas (CARB), an independent government agency charged Université de Montréal prices started falling. Nobody noticed anymore, and the with managing the system’s rules, regulations, and opposition was silenced. [The government] got lucky.” participation.26

When designing and implementing its cap and trade In comparing the two bodies, interviewees noted that system, Quebec’s government engaged with industry CARB leans heavily on third parties for support in areas early and often. Many of our contacts characterized this such as offset protocol development and registries. By decision as one of the more politically contentious aspects design, these stakeholders can bring protocols to CARB for of the process. On the one hand, the move allowed the review, which the board can in turn review and adopt as government to earn the private sector’s support prior to official protocols. the system’s launch. On the other, interviewees felt that In Quebec, there is no equivalent process for advancing truly broad industry support didn’t in the end materialize, protocols, and no third-party review. One interviewee and that closed-door meetings with individual sectors described the setup as one “done in isolation with no created both real and perceived inequity in the system. transparency.” Another characterized the province’s The best example of this, according to our non- approach as “slow” and “not one that is business- government sources, is the way the province handled oriented — the whole focus is on environmental integrity.” free allocations. While several industries, including This suggests that the system could be strengthened if aluminum, pulp and paper, cement, and others, receive officials ensured processes were transparent and easier free allocations in Quebec’s cap and trade system, it is not to understand. clear how they are distributed. While the total number of allowances — and a list of the entities that receive them — is published in the Gazette officielle du Quebec,25 only the government knows the exact number received by each.

25 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- 26 http://www.arb.ca.gov/html/mission.htm spede/technical-overview.pdf 16 17 7. Address competitiveness concerns with a home grown approach.

“There are appeasement measures that government can negotiate— but [we] need to ensure the balance between appeasement and system integrity.” – Karel Mayrand, David Suzuki Foundation “The allocation approach with industry was good. The government worked quite closely with affected industries well in advance so they understood they needed a step-by-step approach with gratis allocation at the front end.” – Katie Sullivan, IETA “Need support from progressive businesses. Business has a lot of sway in government, and if business is seen as isolated, it becomes ‘environment versus economy. If progressive businesses are on board, then government can act with broad-based support.’” – Karel Mayrand, David Suzuki Foundation “The system was designed not to hurt those sectors thanks to free alloca- Courtesy of the Centre for Sustainable Development tion of allowances. The free allowances are almost a form of support to

When Quebec set about engaging with business and Interviewees felt these meetings were essential in those sectors, but the system is set up to assure it won’t have a damaging industry on its system design, it kept two anticipated negotiating design elements — namely, the free allocation impact on trade-exposed sectors.” – Interviewee concerns front and centre: Maintaining competitiveness, of emissions units — that were felt to be critical to and overcoming expected opposition. secure industry support. They also helped ensure that trade-reliant sectors would not view themselves as The Quebec government invested a great deal of time unfairly targeted. Sectors receiving free allocation of sitting down and listening to businesses, interviewees allowances include aluminum, lime, cement, chemical and told us. Several cited “if not weekly, then at least monthly” petrochemical, metallurgy, mining and pelletizing, pulp meetings to keep an open channel with affected parties, and paper, and petroleum refining, among others.27 Under and quickly respond to concerns. These meetings “helped the system’s design, fuel distributors are not eligible to get businesses to support the market before it came to receive free allowances.28 As a whole, this approach into force.” helped Quebec secure a supportive business community for its cap and trade program and subsequent California linkage.

27 Manufactures of glass containers, electrodes, gypsum products, and 28 Some thermal power producers are eligible to receive free allowances. some agri-food establishments The allowance distribution process is described in sections 39 to 44 of the Regulation pertaining to the cap and trade system for greenhouse gas emission allowances 18 19 Tax Politics How the Government of Quebec prevented its cap and trade system from becoming a wedge issue at the ballot box

Political considerations lie at the heart of any major “It was never an election issue, never policy introduction — and Quebec’s cap and trade system is no exception. That said, our Quebec-based a wedge politics issue, never was this expert commentators were unanimous: Climate policy questioned” – Erick Lachapelle, action and the cap and trade system were never an election issue. Université de Montréal Under the governing Quebec Liberal Party, the “In Quebec in general, climate change province demonstrated its commitment to action by setting a target to reduce emissions 20 percent below policy becomes a race to the top be- 1990 levels by the year 2020. In 2012, the National Assembly passed a resolution “deploring” Canada’s tween the parties. No debate at all on withdrawal from the Kyoto protocol. “Quebec for the big question of whether we should its part, intends to respect and make known its commitment to meet the greenhouse gas emissions take action to tackle climate change” reduction target,” the resolution stated. It was only – Hugo Séguin, Université de Montréal one of two such decrees that passed in the session with unanimous consent from all parties.

When the Parti Quebecois (PQ) rose to power later in 2012, one interviewee recalled a personal thought about what might happen, “for partisan reasons the PQ had critiqued the market before the election, if it came from [former Quebec Liberal Party premier] Charest it was highly suspicious.”

Instead, the PQ made an extended commitment to the cap and trade system, and an even stronger commitment to reducing emissions; a 25 percent reduction below 1990 levels by 2020.

Because of the strength of public support on climate action, inaction on climate became a political third rail. Dismantling the cap and trade system was never an option for government. This is one of the few jurisdictions in North America where this is the case.

20 21 8. Design your system to support economic success.

“We know there is huge potential in the green economy. For example, in Quebec there’s a huge emphasis on the electrification of transportation. We have lots of companies that benefit from the turn towards a green economy.” – Interviewee “I think the effect on the economy is neutral. Even with the slowdown in Quebec’s economy now, nobody is linking that (or even part of that) to the carbon market, and I have never heard of an industry refusing to come to Quebec because of the carbon market.” – Interviewee “There was a strong belief that the world was heading to decarbonization, and that a price on carbon was an essential part of that. Those who were most prepared would be the biggest winners economically.” – Interviewee “It’s neutral on the economy for now, but it’s not a bad thing to be a Courtesy of the Centre for Sustainable Development pioneer. It may help better position Quebec for the future.” – Interviewee

Quebec’s cap and trade system is too new to yield mean- Because Quebec generates relatively low emissions ingful empirical data with respect to economic effects. from its hydroelectric production, one source said that Regardless, our interviewees were pointed in their com- participation in a low-carbon economy will ensure that ments about its role in the province’s economy. Generally, “Quebec will be a winner, because our products already they agreed that: have a lower carbon footprint, thanks to our electricity.” Others praised the Green Fund’s clean transportation 1) The cap and trade system has had a neutral effect on investment requirement, and the jobs that it creates. Quebec’s economy to date; Those who felt that the cap and trade system has had a 2) The system will help Quebec stay on the leading edge of neutral impact on the economy generally believed that it a new, greener economy; and was benefitting from the decline in oil prices — creating 3) Chances for success improve if new partners join Quebec less of a price increase than otherwise might have and California under the Western Climate Initiative. occurred. Any negative performance in Quebec’s economy can be attributed to larger macroeconomic issues, which Overwhelmingly, the majority of participants stressed the have overshadowed the results of the cap and trade second point — preparing Quebec to enter into a new, system, itself operating at capacity only since 2014. green economy — as the system’s primary economic benefit. One interviewee described entering into a cap and trade system as “an economic instrument, so that Quebec would be the economic winners.”

22 23 9. Don’t expect your cap and trade system to do everything; consider it one component of a full suite of climate polices.

“The Quebec government, from the mid-2000s, wanted to be a leader in the fight against climate change. They did many things in that fight; cap and trade was not the first. Since 2006, we had the Green Fund, which generated $200 million a year dedicated to tackling climate change.” – Interviewee “In 2009, Quebec announced GHG emissions reduction targets for 2020 and integrated these targets in its climate change action plan — but the action plan wasn’t enough on its own. Quebec wanted a steady money stream to ensure that programs could then help reach the targets. ” – Hugo Séguin, Université de Montréal “California had decades of investments in energy to transform its In both Quebec and California, the cap and trade system is Two-thirds of Quebec’s cap and trade revenue will fund just one component of a suite of policies designed to fight transportation-sector improvements. Coincidentally trans- electricity sector, so the proportion generating from clean sources was climate disruption. As ably described by the University of portation fuels produce 43.5 percent of the province’s increased.” – Mary Nichols, California Air Resources Board Ottawa’s Sustainable Prosperity think tank, both systems carbon pollution.32 Meanwhile, voters typically support serve as a backstop measure, making other climate policies public transit and other clean transportation initiatives. more robust. One interviewee noted that, because of decreased revenue in other areas, “a dedicated funding stream California officials expect that complementary allows the government to put investments where it policies — such as the state’s renewable energy portfolio otherwise would not have been able to.” and low-carbon fuel standards — will realize 85 percent of 2020 emission reductions.29 Similarly, Quebec details 30 Interviewees emphasized that the cap and trade system priority projects expected to result in 6.1 of the estimated was just one piece of the puzzle in a broader government 11.7 megaton reduction required for Quebec to meet its plan to help tackle climate disruption. In the case of Quebec, greenhouse gas emissions targets.30 this helped to capitalize on the public’s acceptance of climate change as a threat and the government’s commit- Quebec officials never envisioned their cap and trade ment to taking a leadership role in addressing it. system operating in isolation. Our sources pointed to the province’s previous climate change policies, specifically its fossil fuels levy,31 as the first phase in a more compre- hensive strategy. The cap and trade system became one component of that larger strategy, not insignificantly, the one that generates the revenue required to fund it.

29 Purdon, M., Houle, D. & Lachapelle, E. (2014). The Political Economy of 32 http://www.mddelcc.gouv.qc.ca/changements/plan_ California and Quebec’s Cap-and-Trade Systems. Sustainable Prosperity action/pacc2020-en.pdf, page 22 Research Report, page 5

30 http://www.mddelcc.gouv.qc.ca/changements/plan_ action/pacc2020-en.pdf

31 Ended December 31, 2014 24 25 10. Get ready for the global spotlight.

“It’s excellent for Quebec’s reputation. Quebec has positioned itself as a leader and that looks good on the province. Quebec will make use of this at the Paris climate talks as a significant accomplishment.” – Vincent Pouliot, Gaz Métro “Really, this has put Quebec back on the map. There’s a new interest in Quebec that didn’t exist at this level before.” – Interviewee “We can say we’re unique, we’re in the avant garde, we’re advising the World Bank on carbon pricing, and so on.” – Hugo Séguin, Université de Montréal “That is the game changer I have seen. Quebec being pointed to interna- tionally as a sub-national that is a total climate leader.” – Katie Sullivan, IETA

While it is still too early to assess the economic expressed some hesitation with respect to Quebec’s performance of Quebec’s cap and trade system, when efforts to reduce carbon pollution 20 percent by 2020. it came to assessing the success of the policies, our That source cited the lack of alignment with California’s interviewees were unanimous on one point: Carbon targets, and the province’s “freezing or re-evaluation of pricing has significantly enhanced Quebec’s reputation on other climate programs.” the world stage. Finally, the system’s designers look back on it as a When asked about environmental benefits from the cap highlight of their careers. One called it “the most fun and trade system, generally, interviewees viewed the subject I’ve ever worked on.” Former Premier Jean environmental successes as “longer-term.” It is a benefit Charest described it as “very comforting to know that this that the cap and trade system has helped raise awareness approach could make a difference.” All of the interviewees among businesses about the need for greenhouse who helped develop the policy reported feeling a sense of gas emission management. However, one interviewee pride in what has been accomplished.

26 27 Parting Thoughts We ended our interviews by asking, “What would be your advice to other jurisdictions considering a cap and trade policy?” Here are some of the responses.

“Raise awareness, talk about it in positive terms. Create a broad coalition in favour of action. You also need supportive businesses.” – Karel Mayrand, David Suzuki Foundation

“Be very clear and determined when you decide to put it forward. Think it through in advance, say you’re doing it, “Be among the first — coming in last is and ask everyone to work with you on just a losing proposition.” – Interviewee getting the design right.” – Jean Charest, Former Premier of Quebec “Take it easy on the offsets at the beginning, because it’s “Arrange that you have civil society hard to put the toothpaste support all the way.” – Hugo Séguin, back into the tube.” Université de Montréal – Erick Lachapelle, Université de Montréal “Join existing systems like the WCI rather “Think about what elements are neces- than re-inventing the wheel. The WCI sary to add for linking, and what can be “Try to forge coalitions, “Once you’ve taken the decision, it’s isn’t perfect, but it’s rigorous, and it’s tailored to suit an individual jurisdic- not just with industry but taken. There is no turning back. You’ll much easier than inventing a new system tion. As long as the basics are the same, with other political parties, have critics, you’ll have opponents, but from scratch.” – Vincent Pouliot, Gaz Métro there’s a lot of room for individuality.” given the urgency of the once you decide, you get it done.” – Mary Nichols, Chair, California Air problem, and given that – Hugo Séguin, Université de Montréal Resources Board this is good policy accord- ing to all the experts and “Increase levels of transparency, and “Consult frequently and thoughtfully economists who can back find a place for the creativity of eco- with industry and people who under- you up.” nomic actors.” – Interviewee stand markets. It’s a market-based – Erick Lachapelle, Université mechanism and designing a market is de Montréal not on the CVs of a lot of environmental “Don’t sell it as a system to punish the regulators. Don’t just think about com- bad guys. Environmental groups need pliance, think about secondary markets, to hear that. It’s a carbon market, and driving liquidity, broad participation we don’t want it to be seen as punish- and price discovery, etc.” ment. The goal is to put in place a new – Katie Sullivan, IETA economic tool, and you have to present it that way.” – Interviewee

28 29 Appendix A List of Questions for Interviewees

Our team interviewed 10 experts during the fall of 2014 12. In your view, how important is the linkage to Inside North America’s Largest Carbon Market: Ten Lessons from and the first months of this year in semi-structured California’s system? the Front Lines of Quebec’s Fight Against Carbon Pollution conversations based on the questions below. Not all 13. What are the benefits of that linkage to Quebec, if any? interviewees were asked all of the questions. Sarah Petrevan 14. What are the drawbacks, if any? April 2015 Developing and introducing the cap and 15. Now that we have a couple of years of experience with Printed in British Columbia on 100 percent recycled, trade system the cap and trade system, how would you characterize its post-consumer paper. 1. In your opinion, what motivated the Government impact on Quebec’s: © 2015 Clean Energy Canada of Quebec to consider and introduce a cap and trade • Economy? system? All rights reserved. Permission is granted to reproduce all or • Greenhouse gas emissions? 2. Designing any cap and trade system involves mak- part of this publication for non-commercial purposes, so long ing decisions about things like the use of revenues, the • Reputation? as the source is cited as “Clean Energy Canada.” allocation of allowances, and the use of offsets. Which of 16. What allowed Quebec’s cap-and-trade system to Clean Energy Canada (cleanenergycanada.org) is a program of Quebec’s design choices do you think will make the big- survive an election / change in government? the Centre for Dialogue at Simon Fraser University. We work gest difference to the policy’s effectiveness? 17. How likely do you think it is that the cap and trade to accelerate our nation’s transition to a clean and renewable 3. During the development of the cap and trade system, system will remain in effect over the long term? Do you energy system. Follow us on Twitter via @cleanenergycan. which aspects of its design proved the most contentious? anticipate significant changes to the system design in the Each Monday we publish the Clean Energy Review, a free 4. Think back to when the policy was first announced. coming years? weekly digest of climate and clean energy updates from How was it received? Cap and Trade Politics across Canada and around the world. Subscribe at 5. Were you surprised by any of the responses from cleanenergycanada.org/review. particular groups or individuals? 18. What were the political advantages, if any, of the introduction of the cap and trade system? What were the Available digitally at cleanenergycanada.org 6. Were the government’s communications efforts disadvantages, if any? effective in responding to critiques or concerns about the system? Why or why not? 19. From a political point of view, how could the government’s rollout of the cap and trade system have 7. What approaches / strategies / tactics did Quebec use been improved? during negotiations with California—a far larger jurisdic- tion—to reach an agreement that worked for Quebec? Reflective Questions Effect of the Policy 20. What would be your advice to other jurisdictions considering a cap and trade policy? 8. Do you believe that the cap and trade system has harmed trade-exposed sectors? Why or why not? 21. If it were starting all over again, what should Quebec’s government do differently? 9. Is Quebec’s approach to auctioning / free allocation appropriate? 22. Looking back on it now, how do you feel about your participation in the development of the policy? 10. Do you think Quebec uses its auction revenues effec- tively? Could other uses of the revenue be more effective?

11. Do you think the price level and stringency of the system is about right? Why or why not?

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